How managing your environment can impact your long term investing goals
Emotions and biases are one of the most significant hurdles we have to success in anything. Most failure lessons where the hero of the story had control over the outcome are of the hero struggling with his emotions or biases.
Emotions and biases in investing can vary:
- Fear leads to selling low at the worst time, in an attempt to "save what's left."
- Greed leads to unnecessary risk-taking like leveraged investments that can wipe you out with some volatility or risky options trading.
- Pride when you had a few good years, and you feel invincible, you take more uncalculated risks that can lead to a downfall.
- Fear of missing out is when you see people on Twitter getting rich with Tesla. Or the next random guy on r/wallstreetbets gets 50,000$ in one hour of options trading. You jump in without due diligence.
This list is by no means exhaustive, but it gives us a foundation for the discussion.
Emotions are one of the biggest risk factors we have as investors, so it's worth taking the time and figure out a system to control this risk.
Avoid the emotions
When there's a problem, there are usually two viable options: face the problem, develop a way to handle it (in our case, control your emotions) or avoid the problem (in our case, avoid triggering the emotions at all).
The evidence we have on how we face emotions and fears strongly suggests we should avoid it, as almost no one can develop the skin to manage it and win.
This concept is true not only in investing. One of my favorite books is "Atomic habits" by James Clear. A core concept he presents to form good habits or avoid bad habits is controlling the environment to make it easier or harder to do something.
Want to stay in shape? Sign up to a gym a walking distance from you, not a driving distance. Make it easier to reach the gym.
Want to keep your diet? Don't buy ice cream to sit on your refrigerator. Make it harder to reach an ice cream.
The same concept also appears in "indistractable" by Nir Eyal. Want to be less distracted by your phone while working? Keep it in a different room. Make it harder to get to it.
The same concept applies to your investment practice. Make it easier to reach positive things to your practice and harder, much harder for bad influences to reach you.
Great investors control their environment
Buffett usually comes to mind, as he famously chose to live away from any financial center - in Omaha. But I want to focus first on Guy Spier that made it into an art.
In his book, "The Education of a Value Investor", Guy lays out how he tries to mimic Buffett's environmental control. After living and starting his fund in New York, the center of the financial market, Guy chose to leave for Zurich.
Once in Zurich, he also tells the story of having a Bloomberg terminal in his office - the stress and noise of data that creates. He then chooses to separate a room for "busy work" with the terminal (and a standing desk so he wouldn't be too comfortable) and a deep-work room.
I highly recommend reading the original in his book to get a more profound feeling of why he did it and how it positively affected him.
Bad environment can drive a wrong action
Money in the market is made by waiting, not by moving. If you have the wrong environment around you, it might drive you to take actions that will harm your long-term returns.
Today, these environments are available everywhere. Moving to Omaha or Zurich won't help you if you follow the wrong kind of people on Twitter and are obsessed with reading every opinion.
Watching CNBC with rotating experts, each fear-mongering and driving you to go in a different direction, will eventually get through to you. If you watch daily and take action 3% of the time, you'll change your portfolio more than 10 times a year.
Be thoughtful when you create your environment. Who you follow on Twitter, what groups you participate in, what newspapers you read, and what videos you watch. Nobody is immune to emotional pitfalls.